Nvidia earnings will be a data-center show, but don’t miss the software on the side stage
Nvidia Corp. is known for its chips, but as it resides at the top of the semiconductor segment in terms of valuation, it may be time to look at the software that runs all those the graphics processing chips.
Nvidia NVDA,
Evercore ISI analyst C.J. Muse, however, sought to change the conversation heading into the earnings. Muse raised his price target to $250 from a split-adjusted $187.50 the week before the earnings report, and hiked his 2025 earnings-per-share estimate to $7.50 from $6.25 on one word: Software
“We compared Nvidia’s competitive moat, growth metrics, and margin profile to software companies rather than traditional semiconductor companies – with striking similarities leading us to suggest that Nvidia is more accurately compared with the software group, thus supportive of a sustainably higher multiple,” Muse, who has an outperform rating on the stock, wrote.
“We believe the company’s software investments are at an inflection point where we see $4B+ in incremental software revenues into the 2025 time frame,” Muse said.
The analyst cited Nvidia’s AI Enterprise platform in partnership with VMware Inc. VMW,
This past earnings season, chip makers duked it out in the data-center arena with Advanced Micro Devices Inc. AMD once again grabbing share from Intel Corp. INTC,
What to expect
Earnings: Of 33 analysts surveyed by FactSet, Nvidia on average is expected to post adjusted earnings of $1.02 a share, up from 82 cents a share expected at the beginning of the quarter and 55 cents a share reported a year ago. All figures are adjusted for Nvidia’s 4-for-1 stock split during the quarter. On Estimize, which crowdsources projections from hedge funds, academics and others, the average estimate calls for 91 cents a share
Revenue: Wall Street expects revenue of $6.33 billion from Nvidia, according to 35 analysts polled by FactSet. That’s up from the $5.44 billion forecast at the beginning of the quarter, and the $3.87 billion Nvidia reported in the year-ago quarter. In its last earnings report, Nvidia forecast $6.17 billion to $6.43 billion. The average Estimize estimate is for $6.47 billion. On top of data-center sales, analysts also expect gaming sales of $2.98 billion.
Stock movement: During the quarter, which started on May 2 and ended Aug. 1, Nvidia shares rose 30%, while the PHLX Semiconductor Index SOX,
What analysts are saying
Citi Research analyst Atif Malik, who has a buy rating and a valuation of $223 on the stock, also alluded to software as the reason for his higher-than-average valuation. Malik said he is “5% above consensus 2H data center sales on enterprise recovery and increasing software-as-a-service sales contribution for managing large scale AI workloads.”
Malik said his modeled compound annual growth rate of 45% or more is “led by Cloud and AI adoption in data centers over the next three years.”
“Moreover, data center product mix contribution from hardware to systems to software should help the stock grow into its multiple over time,” Malik wrote.
UBS analyst Timothy Arcuri, who has a buy rating and raised his price target to $250 the week before, gave a more traditional earnings preview. He sees Nvidia’s results and outlook “solidly higher on Data Center and we are raising estimates to reflect likely upside due to cloud ramp, enterprise recovery (~50% of NVDA DC biz), Ampere product cycle hitting mid-innings, and read through from Intel/AMD.”
Of the 41 analysts who cover Nvidia, 34 have buy ratings, five have hold ratings, and two have sell ratings, with an average price target of $204.21, according to FactSet.
